2 Plays On China's New Luxury Class

With 1.3 billion potential customers, appealing to the Chinese consumer is a major theme in investing in the nation. As the country prospers, the newly emerging and growing middle class will hopefully adopt a consumer culture that is similar to those of other modern nations. This shift is becoming a major force in the Asian country. Since 1970, nearly 400 million Chinese citizens have moved above the poverty line. The C.I.A. estimates that in 2008 alone, approximately 200 million rural laborers and their dependents relocated to urban areas to find work.

An attractive way for investors to play on the birth of the burgeoning Chinese middle class is to take a look at the purveyors of entry-level luxury goods. While here in the United States we have cut back on high-priced lattes and designer shoes, demand for these items has grown overseas. Today, the Chinese middle class stands at an estimated 100 million to 150 million citizens, and there is still room for expansion.

It's All about Sunglasses and PursesWhile you may not recognize the name, you are probably familiar with Luxottica's (NYSE:LUX)products. As the largest retailer and manufacturer of sunglasses and glasses, the company operates under several major brands, including its wholly owned Ray Ban brand, or licensed brands such as Versace, Chanel and Polo Ralph Lauren (NYSE:RL). Luxottica sells its eyewear through its retail outlets including Lens Crafters and The Sunglass Hut. The key to Luxottica's Asian plan lies in the acquisition of three major players in the Chinese market: Modern Sight Optics with its 28 stores in Shanghai, Minglong and its113 stores in Guangdong and Xueliang's 79 stores in Beijing. This brings Luxottica's total Chinese penetration to 270 stores. In addition, the company plans to expand its LensCrafters brand into the country, operating 90 stores. The company continues to mint cash, pulling in 80 million euros for the first quarter of 2009.

Coach Inc. (NYSE:COH) is hoping that the very successful strategy it implemented in Japan to grow its market share from less than 2% in 2000 to nearly 12% in 2008, works in China. Currently, the handbag market in China is only a $1.2 billion industry, similar to where Japan was in 2000. And like in 2000 Japan, Coach operates at just a small fraction of that; around 3%. The luxury maker of purses and other leather goods hopes to achieve a target of $250 million in retail sales and 10% market share over the next five years. Coach now operates 26 locations in the nation. This includes eight locations in Hong Kong, two in casino-rich Macau, four in Shanghai and four in Beijing. To continue with its market share goals, Coach is planning on opening about 50 additional locations in China during the next five years.

Bottom LineIn the United States, luxury and consumer discretionary companies are having a rough time during the global crisis. But in China, where the middle class is just getting started, demand for luxury goods is growing. Both Luxottica and Coach offer investors a way to play that budding market. (For more, check out Top 6 Factors That Drive Investment In China.)